VC Perspectives from a Former Entrepreneur – Jeff Bussgang

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Watching the Golden Globes last night, the message hit you like a two by four. Black dresses, biting jokes, poignant acceptance speeches — all hitting on the same set of themes. At one point in the evening, my teenage sons turned to me and my wife and asked innocently, “are they going to move on at some point from this activism thing?” No, guys. America is not ready to move on. Not even close.

This zeitgeist is proving very challenging for business leaders, who by and large prefer to remain nonpartisan and disengaged from politics. As The Economist recently observed, “The Trump era has made it harder for executives to stay above the fray.”

There are two separate but powerful forces coming together at this point in time driving this phenomenon. First, a recognition that great companies and great leaders are mission-driven, not just bottom line-driven. Today’s workforce (looking at you, millennials) are seeking inspiration from their work and want to associate with companies and brands that match their progressive values. Customers are holding brands accountable for not merely the quality of their products, but also the quality of their behavior.

Second, the daily headlines and dominant news cycles focused on policies and statements coming out of Trumpland make it impossible for business leaders to be bystanders. Instead, business leaders are being forced into the sometimes uncomfortable position of becoming upstanders. When political leaders behave in a manner inconsistent with a company’s mission and values, business leaders face a workforce and a customer community that demands speaking out in an authentic, visible fashion.

The State vs. America, Inc.

A prime example of this tension business leaders face was the resignation of the president’s entire business council in the wake of Charlottesville. Think about that for a moment — normally, these business councils are a CEO’s dream: an opportunity to network with other CEOs to generate useful deals and insights while building a direct relationship with the president and other powerful government figures who could shape your company’s fate (case in point: AT&T fighting to merge with Time Warner).

Other examples include the flare-ups between CEOs and state governments. When Indiana’s legislature passed a controversial religious freedom law (soon to be heard by the Supreme Court), many CEOs declared they would stop doing business in Indiana. Salesforce CEO Marc Benioff’s actions and advocacy were particularly notable, canceling all Salesforce programs that would require customers or employees to travel to Indiana.

When North Carolina passed its restrictive bathroom law, business leaders reacted strongly, following the outrage of their employees and customers. Suddenly, the state that was a symbol for innovation and a business-friendly environment (e.g., Research Triangle Park luring biotech firms away from Massachusetts) was viewed as a pariah, costing it many billions of dollars according to an AP analysis.

Calling for a Movement

I struggle to find the right phrase to capture the essence of this movement, but the movement is undeniably growing into a more, powerful force that can’t be ignored. One that I like is Compassionate Capitalism, conveying that business leaders aren’t abandoning capitalism but rather seeking to exercise their capitalist muscles to pursue good works. Salesforce’s Benioff wrote an obscure book with this title nearly 15 years ago. Perhaps it is worth dusting off. The Pope’s surprise TED Talk last year called for a Revolution of Tenderness, particularly from the world’s tech elite:

“How wonderful would it be if the growth of scientific and technological innovation would come along with more equality and social inclusion. How wonderful would it be, while we discover faraway planets, to rediscover the needs of the brothers and sisters orbiting around us. How wonderful would it be if solidarity — this beautiful and, at times, inconvenient word — were not simply reduced to social work and became, instead, the default attitude in political, economic and scientific choices, as well as in the relationships among individuals, peoples and countries.”

Whatever we call it, the trend is clear. Business leaders are being asked to step up and lead in unfamiliar territory. Many are not well prepared for the burden.

A recent Harvard Business School alumni asked me skeptically: “Are you all teaching students how to be leaders, not just managers? Are you teaching them to solve big societal problems, not just small business problems?” I think the answer is yes but I continue to reflect on what more we can be doing to prepare business leaders to be leaders during this historic time. Our local business group, The Alliance for Business Leadership, is proving to be one effective forum in this regard, but we need many more.

Society will be much better off if we can figure it out. And if business leaders can become upstanders, Oprah’s evocation of a new day will come all the sooner.

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When Julisa Salas told me she wanted to join a startup, I was worried. Her background was not exactly typical for StartUpLand and I was concerned her search would end in disappointment.

Julisa had been a liberal arts major (English Language and Literature) who secured her first job out of college at a large investment bank before returning to school for her MBA. Capable, smart and personable, she was also the type of candidate that most startups shy away from — no technical background, zero startup experience, and a young woman of color trying to break into an industry dominated by white men.

A few months later, Julisa emailed me with great news: she had landed a job at one of the hottest startups in the country, a fast-growing restaurant technology platform called Toast that had just raised $30 million in financing and would later go on to raise another $100 million to fuel its rapid growth.

How did she do it?

Wanted: Joiners

In my work as a venture capitalist at Flybridge and professor at Harvard Business School, I have advised thousands of professionals, young and old, seeking jobs in StartUpLand. One of my observations is that “joiners” don’t get enough credit or recognition.

Founders receive all the accolades and attention, but it’s employees number 2 through 2000 that turn a great idea into a great business.

The problem is, startups can be hard to figure out. How can you tell whether a company has the potential for success and is the right fit for you? What are the best entry points?

For the last few years, I have been interviewing joiners to determine the patterns as to how they found their way into startups, selected the right startup for them, and figured out what are the jobs to be done. I wrote Entering StartUpLand to help deconstruct startups for joiners, providing them with a playbook to navigate their way in and be effective and successful when they get there.

That’s where Julisa comes in.

The Joiner Playbook

Julisa is a textbook case of an outsider finding her way into StartUpLand. The playbook she executed is precisely what I recommend others follow. Here’s what she did:

Pick the right company. My advice to picking the right company is to filter your decisions by these four factors:

City: Startup hubs are tight communities comprised of clusters of universities, established technology companies, entrepreneurs, angels and venture capitalists. Decide what city is right for you based on personal preferences and culture because once people choose a startup community, they tend to stay. Julisa was most comfortable in Boston. She had grown up in NYC and wanted to stay on the East Coast to be close to family but loved the vibe of the Boston tech scene.

Domain: Select a field you’re passionate about. Ask yourself what are your favorite brands, websites, apps or subjects to read about? For Julisa, she was excited about SaaS, mobile’s disruptive force on vertical industries, and hospitality was of particular interest to her.

Stage: I often use a road-building metaphor to describe the various stages of a startup — the jungle (where you are surrounded by a tangled mess and have no idea where the paths are); the dirt road (where the path is visible but bumpy and windy); and the highway (where you’re trying to speed as fast as you can down a straight and smooth road). Julisa felt that the dirt road was best for her. As someone who wasn’t technical, she wanted a company that had figured out product-market fit and was now focused on scaling sales and marketing.

Probability of Success: This step is the hardest to get right. How can an outsider select the likely winners in a given domain? The simple answer is to ask a handful of insiders. Julisa spoke to entrepreneurs, lawyers, headhunters, VCs and professors in the Boston startup ecosystem and pushed them to name their favorite dirt road stage, SaaS companies. A few companies kept coming up again and again, and Julisa began to target those companies.

2. Arrange a warm introduction. Startups are full of people with large, vibrant social networks. Look for mutual connections, or friends of friends, who might put you in touch with the right people. Harness your digital footprint via LinkedIn, Facebook and Twitter as well as your offline network to prompt contacts to endorse you and find an “in” to your desired startups. Warm introductions trump a cold email every time.

The startup community is generally very generous with its time and has a strong “pay it forward” culture.

Julisa was able to use her network of professors, friends, and contacts to get her a foot in the door with a few startups that fit her target criteria. Once she earned that first meeting, though, the real magic was what happened next.

3. Come bearing gifts. When Julisa found out she had a meeting secured with one of the Toast executives, she immediately developed a plan of action to learn more about their business. Since their target customer was restaurants, Julisa grabbed a clipboard and pad of paper and walked up and down the street for a week, interviewing restaurant owners about their experience with point of sales systems. After interviewing owners from 50 restaurants, she distilled her notes into a few key observations and walked into the Toast interview armed with a rich set of feedback.

When the interviewer realized what she had done, her lack of technical skills or startup experience became irrelevant.The whole conversation shifted to her market insights and how Toast should react to them.

By the end of the meeting, the interviewer had invited her back later that afternoon to meet some additional Toast members. In the interim few hours, Julisa quickly put together a slide presentation distilling her research results and used it to frame the conversation. The Toast executive team was blown away and offered her a job a few weeks later. Today, Julisa is Director of Growth at Toast and well on her way to an amazing career in StartUpLand.

Make Julisa’s strategy work for you

Julisa’s story is evidence that you don’t need to be an engineer or a startup veteran to successfully navigate your way into StartUpLand. Choose wisely and find a warm introduction to get in the door.

But most of all, come bearing gifts of insight and intelligence and you are bound to get that dream job regardless of prior experience.

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Every year, I present an overview of the Boston startup scene to incoming Harvard Business School and MIT Sloan students. Having refreshed the presentation once again and tried my best to update it such that it would contain the latest and greatest information, I am pleased to post it here. As always, I welcome any feedback or suggestions. My goal is to give an overview of all the amazing companies and support systems in one place so that students can easily navigate what otherwise might seem like an opaque, intimidating community.

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Goldman Sachs and CB Insights recently reported that startups have raised over $1 billion in Initial Coin Offerings (ICOs) this summer — more than the total amount of venture capital raised during the same period.

At Flybridge, we are wading into this uncharted territory as a result of one of our portfolio companies, Enigma, staging an ICO in the coming weeks.

Many investors in the ecosystem that we respect have shared their thoughts on the power of the blockchain and cryptocurrencies to disrupt many industries (and we share those views) but few have discussed the downstream ramifications to our business. Hence, the purpose of this post.

I won’t attempt to provide all the contextual background regarding the blockchain, cryptocurrencies and why they represent such a profound innovation in our world.

Others do a good job of that. Instead I will make a few observations about how an investor might think about the impact of ICOs / token launches on the venture capital industry, in particular, and some of the downstream ramifications that need to wrestled with.

Need for growth capital.

A company that can successfully raise money in an ICO may never need venture capital again. Most of those companies will still require seed capital to assemble their team and fund a year or two of initial development and experiments.

Perhaps, when things settle down a bit more, those companies will even raise series A capital from traditional institutional sources to expand the product features, beef up the operations team more fully and make progress in finding initial product-market fit.

Early stage entrepreneurs will also still likely value experienced advice on company-building from seasoned venture capitalists. But once entrepreneurs have their initial team and product in place, a few smart advisors around the table and the social proof required to attract great talent, why would they raise additional dilutive equity capital if they can raise non-dilutive capital through the sale of tokens?

Put aside the frauds and hucksters — time and transparency will cause them to shake out — and obviously not every business model is a fit for an ICO. But many are. Good teams creating something of real value around which they can build a community now can tap another source of scale capital available to them.

I wonder, for example, if our portfolio company, Codecademy, would have avoided its latest financing round and instead created “CodeCoin” in order to incent contributors to software development lesson plans and a marketplace for coding content? In these early times, some startups may be hesitant to pursue this path because of the uncertainty and perceived risk.

But once the regulatory and systems infrastructure for ICOs is in place and the friction is reduced, it will become a more common means of raising growth financing, representing a disruptive force for later stage investors. In short, token sales allow early stage companies to skip the series B round and beyond.

Shift of value from equity holders to token holders.

When a company that has raised venture capital creates a token and raises capital in an ICO, there is a real risk that value is being shifted from the equity holders to the token holders.

In fact, that is somewhat the point — a community is created and value begins to accrue to the participants in that community. The hope is that the early stage investors select companies that have a business model that takes advantage of the growth in the community and the ecosystem around it.

The ICO generates excitement and valuable incentives to contribute to the ecosystem which accelerates its growth and, as the ecosystem grows, the company has a cash flow formula that allows value to accrue to the equity holders of the corporation not just the tokens. But that balancing act is a tricky one and not guaranteed, particularly because business models and cash flow formulas are often hazy in the earliest stages.

Further, not only does substantial value accrue to the community but control and governance over the underlying technology and protocol accrues to the community and token holders as well.

As Sarah Tavel pointed out in a recent tweetstorm, for a company trying to stay nimble and have the flexibility to run a lot of rapid experiments, the very existence and power of the community may reduce degrees of freedom during the search for product-market fit.

We typically advise our portfolio companies to avoid taking on strategic investors at an early stage for this very reason. Entrepreneurs who embark on ICOs may similarly want to be careful before empowering their community of supporters too early.

Fuzzy Governance.

In a world where startups can raise over $1 billion in proceeds in token offreings and avoid later stage financings, how should we think about the investor’s role in governance of the corporation and the community?

Governance of the corporation is a bit easier—Delaware Law has long-practiced guiding principals for things like fiduciary duties such as duty of care and duty of loyalty—but what are the governance requirements and obligations with respect to the token economy and the related community?

Albert Wenger wrote a terrific blog post on this topic where he points out that the governance over the ICO proceeds requires new thinking in order to avoid self-dealing. There may be additional governance issues that need to be thought through with respect to the selling of tokens that companies retain in treasury (often 25% of the ICO proceeds).

Who sets the policy for token sales—management or the board of directors? What happens if the company has raised money in the form of a convertible note and has not yet formed a board of directors? What are the ramifications and conflicts of interest that may exist, particularly if executives and employees have tokens as incentives or have bought tokens (or have friends and family who have bought tokens) in private transactions?

Should early investors be allowed to participate in token sales and pre-sales and how should they treat their investors in those transactions? Our guidance at this nascent stage is to follow the mantra that sunlight is the most effective of disinfectants.

Transparency and open communication is key to establish trust—both between entrepreneurs and investors as well as between entrepreneurs and the community.

Seeking Liquidity.

Another consideration investors need to think through in this brave new world of ICOs is the impact on liquidity. If a portfolio company can raise money in an ICO and retain tokens that then rise in value, it dramatically reduces the company’s incentive to seek an exit.

If the management team and employees receive tokens as part of their compensation plan and those tokens are highly liquid — as they should be after an ICO thanks to the meteoric rise of exchanges and crypto hedge funds — then the value of their compensation may be more through token value than equity value.

How does that impact the management team’s incentive to create equity value and liquidity for the equity holders? Should investors be negotiating with management teams post-ICO to exchange some or all of their equity for tokens to generate liquidity?

Are investors and management as aligned as they are in a company that does not raise money in an ICO or do token sales create more opportunities for misalignment—which gets back to the issue of governance. Our advice on this point is for investors and entrepreneurs to try to talk through as many of the anticipated issues as possible before they come to pass.

In other words, determine precisely before the initial seed round how to ensure as much alignment as possible. The standard seed tools that investors are familiar with, like SAFEs and convertible notes, need to be modified to anticipate token sales (e.g., SAFT agreements and perhaps even SAFTE agreements).

If early stage investors can develop more options for achieving full or partial liquidity in a private company, all the better.

The territory we are all entering is exciting and revealing of the extraordinary potential that cryptocurrencies and the blockchain represent for the economy—yet it is also fraught with complex issues. And there’s much more ground that I haven’t even covered, such as:

VC funds buying cryptocurrencies: how is that different from VC funds buying yen or euros, which our LPs probably would not want us to do, or speculating in Bitcoin or Ether directly? Are VCs going to be competing with crypto hedge funds?

VCs investing in cryptocurrency hedge funds: would our LPs want us to invest in early stage hedge funds? Does it matter if it makes money? What is the liquidity path for an investment in the equity of a hedge fund?

VCs need different structures in their standard convertible notes or SAFE notes in the context of a company being able to avoid follow-on equity financings and thus being able to avoid conversion.

We and our peers are wrestling with all these issues alongside our entrepreneurs and, clearly, one group that is going to benefit are the lawyers who are in the middle of it all!

This article originally appeared on Medium. Thanks to Deanna Rampton from Startup Grind for her help in editing.

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Michael Seibel of Y Combinator (YC) wrote a provocative tweet a few weeks ago, observing that MBAs who apply to YC appear ill-prepared. Below is the tweet and some of his follow-up observations.

Although my day job is a seed-stage venture capitalist (at Flybridge Capital), on the side I teach entrepreneurship at Harvard Business School (HBS) – in particular, a 2nd year MBA class called Launching Technology Ventures (LTV) – and am proud of the fact that our students are performing very well in StartUpLand. Whether it’s unicorns like Cloudflare, Coupang and Grabtaxi, major exits like LearnVest or promising up and comers like Rent The Runway and Earnest, plenty of interesting companies have been created by HBS students right out of school in the last few years. And HBS alumni are proving to be effective and scaling and managing startups and large-scale tech companies years after graduation, not just starting them right out of HBS. Sheryl Sandberg/Facebook, Michael Bloomberg/Bloomberg, Mark Pincus/Zynga, Jeremy Stoppelman/Yelp, Meg Whitman/HP are among a few examples.

That said, I respect YC, its success in picking and training winners, and its immense experience as a startup pattern recognition machine. So I asked Michael for more detail regarding what he was seeing in MBA applicants so that we could make sure we’re addressing any gaps here at HBS. His feedback was interesting and I wanted to share it here (paraphrasing a bit and incorporating other feedback I hear in the marketplace):

MVPs vs. Research – The knock on MBAs is that they classically spend too much time doing research and not enough time building a minimum viable product (MVP) and getting actual market feedback. We’ve done a good job of this at HBS, I believe, where Eric Ries (Lean Startup), Steve Blank (customer discovery) and getting out there and running experiments is hammered into each of our students in their first years. In the second year, we have electives like my class and others that emphasize this approach to company building. But clearly, we should be doing more, pushing our students to be builders not researchers.

No Tech Co-Founder – We could have a robust debate about whether tech co-founders are critical given how many MBA startups have been successfully created without a tech co-founder (e.g., BlueApron, Warby Parker). That said, this criticism is an important one to address. Having technical proficiency is critical to being successful in StartUpLand and, further, having a technical co-founder helps immensely when it comes to MVP creation, iteration and general product development velocity. Velocity is one of the most important, least understood attributes of successful startups that is greatly enhanced by a technical co-founder. So, what’s HBS need to do here? Well, we urge students to mingle with their MIT counterparts, but that’s too passive. We’ve started an EIR program, but need more CTO types as EIRs. And Harvard is in the midst of moving its School of Engineering and Applied Sciences (SEAS) across the river to be co-located with HBS – and doubling its size (thanks, Steve Ballmer). In the last few years, CS50 (Harvard’s introductory computer science class) has been taught at HBS and this year, for the first time, a Code Club was created at HBS. Another major initiative – HBS is launching a joint MS/MBA degree, targeted at hybrid technical-business folks who want to enter StartUpLand. Good steps in the right direction, but clearly we need to do more. Next year, I’m determined to create more opportunities for organic mixing for techies given founders need time to get to know each other informally before leaping into a business partnership.

Commitment. This one was the hardest to hear from Michael. He feels our students are not exhibiting full commitment to their startups but, rather, at times appear to be dabbling. I am sympathetic to his perspective on this. Like most VCs, I only invest in pigs not chickens. Too many MBAs are acting like chickens – not “all in” and exhibiting a willingness to pursue the startup no matter what. As Michael described, “One of our primary qualifications for getting into YC is whether this company would exist without YC.” There is no hedging your bets in StartUpLand.

Speaking on behalf of my HBS colleagues, I know we’re determined to keep pushing our students on these and other areas to make sure that we are producing startups that are embraced by YC, Techstars and other top-notch incubators – never mind investors – rather than appear like strangers in a strange land.

Michael and I did a podcast to continue this conversation on the YC blog, which you can listen to (or read the transcript) here.

(by the way, if you want to prepare for your YC interview, read this and this)

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When I was a computer science undergraduate student at Harvard in the late 80s/early 90s, it was a decidedly uncool and obscure field. We were buried in the basement of the Science Center, coding in LISP and C++ on a UNIX minicomputer. The few of us who survived the brutal problem sets and all-nighters graduated with a strong foundation in software but zero insight into the technology business. Four years later, when I graduated from Harvard Business School in the mid-90s, we learned a ton about business, but nothing about technology.

As a tech entrepreneur, venture capitalist and Harvard Business School (HBS) professor, I have spent my 20+ year career trying to blend these two disciplines: business and tech. Thus, I was thrilled with this week’s announcement that Harvard is creating a joint master’s degree between HBS and the School of Engineering and Applied Science (SEAS). Simply put, the new degree will focus on teaching geeks and techies the business of innovation and tech company management.

This program came together very, very quickly. My colleague, Tom Eisenmann, was one of the main driving forces and somehow managed in less than six months to design, create and secure approval for the program from both faculties and the Harvard board. The fact that SEAS is nearly doubling in size (thanks, Ballmer) and moving next door to HBS in Allston (thanks, Paulson), makes the collaboration between the two schools all the more appropriate and fitting. The benefits of teaching and inspiring future leaders at the intersection of these two important disciplines are immeasurable. I am so glad Harvard and its faculty chose to vigorously innovate in this area.

To learn more about the joint MBA/MS degree, which is accepting applications starting September 6th (!), go here.

In it, she reviews the punditry from 2010, declaring that all New York needed were a few anchor companies to breakout to become the next Facebook or Google.

Part of the Problem: Selection Bias

Unfortunately, that hasn’t played out due to a litany of missed expectations, which Kesller chronicles in detail. She notes that the stars of that period — Etsy, Foursquare, Gilt, Kickstarter, Meetup, Tumblr — have not proven to become the mega-unicorns that many hoped.

They have either sold or gone public at good but not Valley-level prices — like Etsy’s $1B public market cap, Gilt’s $250M sale and Tumblr’s $1B sale — or still exist at an uncertain point on their journey with unfulfilled expectations, such as Foursquare, Kickstarter, Meetup.

Kesller misses the more subtle but larger point that it is very hard to pick winners in StartupLand. While those six companies may not have been massive winners, there have been a few amazing companies emerge out of New York in the last few years that were not on anyone’s “top six” radar in 2010 (or even founded!).

Reality: New York is Cranking

Examples of emerging breakout companies based in New York include:

WeWork: worth $20 billion in their latest round

Vice: widely reported to be worth $4.0 billion

Jet.com: sold to Walmart for $3.3 billion in cash and stock

Oscar: widely reported to be worth $2.7 billion

BlueApron: widely reported to be worth $2.0 billion and preparing an IPO

MongoDB: widely reported to be worth $1.5 billion in its last financing*

* Which I can neither confirm nor deny as we are major shareholders having co-led the Series A.

I remain very optimistic about the next 5–10 years in the New York tech scene. Through our work (led by my partners David Aronoff and Jesse Middleton), I am seeing ambitious entrepreneurs pursuing amazing and diverse market opportunities every day.

The recent IPO of Yext (trading at $1 billion) is a solid step forward for the New York tech scene and there are dozens of private companies worth +$500 million that are growing fast and have tremendous potential. Flatiron Health is pursuing the ambitious goal of fighting cancer with data. Buzzfeed has dramatically changed the way media companies think about information dissemination.

And Don’t Forget Boston!

Interestingly, in contrast, the Boston tech scene has seen the reality run ahead of the hype. Boston’s historical strength in life sciences, enterprise software, cloud, big data and artificial intelligence are all proving to be very fruitful.

For the Boston tech scene, it has been an amazing few years for some very valuable, emerging anchor companies.

I did a quick analysis of what has happened to the value of today’s top six emerging anchor companies (measured by market cap) in the Boston innovation scene from 2010 to 2017. I used Crunchbase’s data to estimate the private valuations in 2010 by using a simple rule of thumb regarding ownership sold in their last round of financing or the initial market cap at the time of their IPO if it happened close to 2010.

The results in the chart below are pretty dramatic. This cohort of Boston companies — Demandware, Hubspot, Logmein, TripAdvisor, Vertex and Wayfair — was worth $15.6 billion in 2010 and are now worth $51.2 billion in 2017.

That’s a 3.3x increase! This increase compares favorably to the Russell 1000 index, which increased only 2.0x during this same period.

The conclusion? Sarah needs to be careful about selection bias, I am still very bullish about the New York tech scene (where Flybridge continues to invest roughly half our fund) and the Boston tech scene has had an unheralded strong run.

Like everything else, it just takes a bit longer than we all might have anticipated. Hang in there, New York — and keep pedaling!